Investment of money in the modern age of connectivity and raised awareness over environmental and social challenges has taken on new significance. Setting aside the core goal of realizing financial returns, investors are on the lookout for a better way to align and balance their values with their investment portfolios. Two large investment approaches have sprung into the foreground: Ethical Investing and ESG Investing. These terms are often used interchangeably; however, they stand for quite different philosophies and methodologies.

Ethical investing is a technique of investment managed on the basis of individual investors' very core personal beliefs and values by avoiding companies that participate in specific activities that one finds especially reprehensible. Socially responsible investing as a concept has been around for quite a while. Early ethical investors shunned companies associated with liquor, tobacco, gambling, or weapons on moralistic or religious grounds as characteristic in human beings. Later on, changing social concerns shifted the focus of ethical investors to all issues relating to labor rights, animal welfare, and environmental degradation since then. The ESG framework, in this context, installs a more measurable, holistic, and material framework for investment.
 

✓Definition: Ethical investment is the technique of investment that purports to achieve ethical and environmental, alongside financial, returns. The investors will try to maximize their investments with their moral values by avoiding companies involved in activities which a person might find annoying or irritating, such as tobacco, gambling, or weapon manufacture.
✓Historical context: its proper roots lying in religious and social movements. Probably the oldest forms of it lie in the behavior of those religious orders which eschewed investments that scripture deemed to reflect a lack of social responsibility in supporting "sin-tainted" industries. 

✓Definition: It identifies performance in parameters related to environmental, social, and governance criteria for the total sustainability and financial risk of the company. In other words, it does not verge with ethical investing or represent simply adding ESG factors into financial assessment.
✓Historical context: Ethical investment, in a real sense, is much older than ESG investing. Actually, from the 1990s, ESG investing started to gain ground when investors realized that there existed a tight correlation between ESG parameters and long-term financial returns. It was in 2006 that draft United Nations Principles of Responsible Investment were drafted in order to outline the evolution process of ESG investing.

While both ethical and ESG investing do take extra exogenous factors into consideration while reaching investment decisions, the two differ in approaches and focuses.

✓Focus: Ethically-based value-driven
✓Approach: Often negative screening. Companies or sectors which go against the values of the investors are not invested in. For example, tobacco, gambling, and companies manufacturing weapons.
✓Scope: This type generally is narrower, focusing on some specific ethical issues. It's easier to link investments with values.

✓Focus: Rating companies on an overall sustainability performance that integrates environment, social and governance factors.
✓Approach: Amalgamation of negative filter and positive filters. More values are taken into consideration than purely values and ethical concerns. 
✓Scope: Has a larger scope as it ranges in scope to a comprehensive score or rating of the impact caused by companies.
✓Impact: Know the potential for long-term investing and decrease the associated risks with ESG factors.


While the terms "ethical investing" and "ESG investing" are used to mean the same thing and hence pretty confusing, knowing the differences that exist between the two approaches will help an investor in making informed choices. 

The terms ethical investing and ESG investing have been used almost synonymously, and for good reason. Indeed, between the two, there is huge overlap with both insisting that nonfinancial variables play important roles in making investment decisions.

 ✓Shared goal: Both are investment strategies which extend the conventional base of financial criteria by adding on ethical, social, and environmental factors in the investment process.
✓Exclusionary screening is common to the approaches, that is, divestment from companies which violate human rights, add to environmental degradation, or turn out dangerous products.
✓Positive screening: It can also form part of the strategy to invest in companies with high ESG performance or at a company level, in one having a positive social and environmental impact.

✓Value Alignment: Both ethical and ESG investing give the investor the ability to align a portfolio with personal values or beliefs. 
✓Risk Management: ESG often tends to come out of improved risk management due to the possibility of identification of risks as well as opportunities over an extended investment.
✓Long-term perspective: Both tend to take a long-term perspective because it is only through sustainable businesses that returns can be consistently expected over time.
✓Growing Interest from Investors: On the positive side, with an increasing number of investors coming forward and considering ethical and ESG factors while making decisions pertaining to investments, this is trending positively; such companies go in tandem with the social changes towards shifts in sustainability.

At large, although ethical and ESG investing are different, they share the basics in terms of making use of non-financial information for creating a positive impact while attaining traditional goals of finance.

More specifically, ethical ESG investing has been notoriously popular recently due to growing attention to areas such as environmental, social, and governance issues. On the other hand, this could offer a very distinctive mix to an investor in financial returns against personal values.

Aligning Values with Finances

✓Personal Values: To this end, one can, therefore, reflect his investments to represent how he would like the world to be. There is always some element of satisfaction from this and some form of internal fulfillment.
✓Long-term financial performance: Most of these investors are of the view that companies having leading ESG profiles are better placed to ensure long-term financial success. This has an assumption that those types of firms would normally be strong, innovative, and better managed.
✓Risk management: ESG would be able to enunciate and help in identifying potential risks that traditional financial analysis might actually miss. Companies with high environmental risk can be very prone to regulatory risk and reputation risk.

•Data Quality and Standardization: Most ESG data turns out pretty bad, and the data is hard to compare across companies. Sometimes, this really makes it hard even to determine the actual ESG performance of a company.
•Greenwashing: A company may exaggerate its ESG credentials to lure investors; therefore, due diligence is quite necessary.
•Trade-offs: The potential return might be sacrificed in case of "ethical" and ESG investment, it has to be very carefully considered by an investor.
•Lack of clear definitions: The words like "ethical" and "ESG" are not clearly defined and may have different meanings. It leads to the chance of confusion.

✓Ethical and ESG investing help investors to merge their goals related to finance with personal values.
✓After all, most investors have grown to believe in the possibility of ESG concerns promoting long-term performance with investments. 
✓There is a serious call for consideration of informed decision-making in investment.

 Consider that investment in an ethical or, for that matter, ESG fund is after all a personal choice enrooted in the values, risk tolerance, and investment objectives of the investor. With the growth in ESG space, investors could now see a greater array of options and data sets to make more informed decisions. 

As one gets into the case studies, it is first necessary to define the terminology:

The investments made on the base of morals, ethics, or social values; it may likely take out various sectors of industries such as tobacco or weapons industries, and companies with disreputable labor practices.

 This investment gives consideration to the general consideration towards environment, social, and governance aspects. This means that the ESG recognizes the companies with huge sustainability profile, considering increasing returns of finances.

The Government Pension Fund Global is one of the big SWFs globally.This fund has an ethical investment policy that helps to avoid companies producing nuclear weapons, cluster munitions, anti-personnel mines, tobacco, and child labor.

The divestment from these sectors has far-reaching impact on how investment in the world is conducted. It made the companies more ethical and responsible towards better governance practices. However, it has been criticized by many that its policy of exclusion has only reduced the basket of investment opportunities and reduced potential return.

Precipitating the inclusion of ESG in the investment process has made BlackRock the leader in investment management across the world. The Company declared a net-zero greenhouse gases emission goal across all the investment portfolios by 2050. BlackRock collaborates with the informational disclosure of companies about climate and precipitates the low-carbon business model.

 BlackRock's stance on climate changed the investment world. It shifted or pushed firms to be serious about sustainability and has also dictated elevated attention that investors should have towards climate-related risks and opportunities. 

Hedge fund Engine No.1 took on ExxonMobil in the 2021 proxy battle and rode on the action-failure regarding climate change by Exxon as one of the major drivers of underperformance and proposed changes to the makeup of the board of directors.

By the end, though winning three places on the ExxonMobil board, Engine No. 1 more strongly showed that investors with a stake in seeing their improvement have begun to take ESG considerations seriously. Other than this, it underlined how even a small investor can make big differences in changing a corporation's behavior through shareholder activism.

Keep in mind that these are some of the examples, and the field of ethical and ESG investing is changing tremendously fast. Deep research and consideration of different factors are very important in making investment decisions.

Subtle as the line might be, it's an important distinction for anyone who seeks to have their portfolio align with personal beliefs. This is based on personal belief and involves eliminating companies in certain activities an individual investor finds morally objectionable. Of course, ethical investing equips the ethical investor with a strong weapon to affect industries he despises. Somehow, it would impact the sets of investment opportunities that would restrict, hence affect the diversification and return of portfolios.

In contrast, ESG investing is a much wider investment strategy looking at corporate performance from an environmental, social, and governance angle. Much more, though ESG presents a greater framework on which companies can be judged from this point of view; challenges associated with standardization of data and green washing are yet to be addressed. ESG integrated investments in decisions that identity potential securities of companies with high prospects engender positive change in society.

It is knowing these intrinsic differences in approach that will allow investors to make informed decisions that are aligned to their values and financial goals. Balanced consideration of the ethical considerations weighed against potential financial implications will guide one through the minefield of responsible investment. One has to consider, therefore, the role of investment players in ensuring positive change at one of the most acute periods in environmental and social challenges facing the world today.

It is the investors who hold the quite literal key to the future—both of business and that of society through ethical exclusion or ESG integration. By so doing, they are really charting a course toward a better, fairer world, possibly attaining long-term financial success by investing according to one's very own values.